global air quality policies for o zone depletion and climate change

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Environmental Economics & Management:

by Scott J. Callan and Janet M. Thomas

Slides created by Janet M. Thomas

Theory, Policy, and Applications 5e

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Global Air Quality Policies for Ozone Depletion and Climate Change

Chapter 13

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Ozone Depletion

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What is Ozone Depletion?

Ozone depletion refers to the thinning of the stratospheric ozone layer Result is a loss of earth’s protection from UV radiation

Primary ozone depleters are chlorofluorocarbons (CFCs) and halons These break down in UV light, releasing chlorine,

which destroys stratospheric ozone molecules

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Controlling Ozone Depletion

International and Domestic Policy

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International PolicyMontreal Protocol and Amendments

Montreal Protocol was signed in 1987 by 24 major countries Called for 50% reduction of CFC consumption and production

through 2000 Amendments outlined a full phase out plan for CFCs,

halons, and other depleters HCFCs to be phased out by 2020; all other ozone-depleters were

phased out of production on or before 2005 Tradeable allowances were issued to Protocol participants An Interim Multilateral Fund was established in 1990 to help

developing nations develop CFC replacement technologies Fund became permanent in 1992

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Domestic Policy on Ozone DepletionTitle VI of 1990 CAA

Required EPA to publish a list of ozone depleters Assign each an ozone depletion potential (ODP) value Establish phaseout schedule for each

Established a national mandatory recycling program to allow use of recycled chemicals beyond phaseout date

Called for programs and research to find safe substitutes

Legislated 2 market instruments to meet phaseout schedule Escalating excise tax on production for sale Marketable allowance system

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Excise Tax on Ozone DepletersEnacted by Congress in 1990

Excise Tax per pound = baset * ODP, where base is the tax rate per pound t is the year in the phaseout schedule

The base as t (i.e., escalating) In 1990, base tax rate = $1.37/pound In 1995, base tax rate = $5.35/pound In 2009, base tax rate = 11.65/pound

based on an annual increase of $.45/pound starting in 1996

Acts as a product charge An excise tax set equal to the MEC at the efficient output

level, QE, achieves an efficient resource allocation

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Modeling an Excise Tax

9

0

$

QE

MSC = MPC + MEC

MPC

MPB = MSB

Q of Ozone-Depleting SubstancesQC

MPC + excise tax

Excise Tax

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Allowance Market For CFCs

Tradeable allowances were issued to largest producers and consumers

Each allowed a one-time release based on its ODP The number of allowances were gradually reduced

to 0 to meet phaseout deadlines

For HCFCs EPA is establishing an analogous program

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Economic Analysis ofOzone Depletion Policy

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Regulatory Impact Analysis (RIA) for the Phaseout of Ozone Depleters

Benefit estimate= $6.5 trillion through 2075 includes health and nonhealth effects

Cost estimate = $27 billion through 2075 impact on air conditioning and refrigeration

Result: U.S. regulations to control ozone depleters were announced in August 1988, less than one year after the signing of the Montreal Protocol

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Assessing Cost-Effectiveness EPA-commissioned a study conducted by Rand

Corporation, which investigated three alternative control approaches

Costs for each approach were as follows Technology-based command-and-control

approach: $185.3 million Fixed emission charges: $107.8 million Tradeable emissions permit system: $94.7 million

Supports the expectation that allowance trading would approach a cost-effective solution

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Price Adjustments In the CFC market

The phaseout plan and excise tax caused supply (S) of CFCs to shift leftward, raising price, so Qd

As price of CFCs rose, demand (D) for CFC substitutes increased

In the CFC-substitute market Technology-driven cost declines in production of

CFC substitutes would shift S of substitutes rightward

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Price AdjustmentsCFCs and CFC Substitutes

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Incentives and DisincentivesMarket for CFC substitutes

Incentive Profit advantage of producing substitutes when

prices were high may encourage production Disincentive

Market power of the relatively small number of firms holding allowances may have deterred development of substitutes

Market power high prices on CFCs abnormal profits less incentive to find substitutes

Corrected in part by the excise tax, which redistributed some of these profits

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Climate Change

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What is Climate Change?

Climate change refers to a major alteration in a climate measure such as temperature, wind, and precipitation that is prolonged, i.e., lasting decades or longer

A source of controversy is the predicted climate response to the increasing production of what are termed greenhouse gases (GHGs)

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What is Global Warming? Sunlight hits earth’s surface, radiates back into

atmosphere, where its absorption by GHGs heats atmosphere and warms earth’s surface

Warming process is natural; becomes problematic if natural GHG levels are disrupted

Among the primary GHGs is carbon dioxide (CO2) Accumulating CO2 is linked to fossil fuel combustion and

deforestation Capacity of each GHG to trap heat relative to CO2 is

measured by a global warming potential (GWP)

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GHGs Contribution to Global Warming

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Source: U.S. Department of Energy, Energy Information Administration, Office of Integrated Analysis and Forecasting (December 2008).

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Separating Myth from Facts Most agree that GHGs (CO2) are rising Scientists agree that rising GHGs will affect

climate Uncertainty is about when this may happen

and the extent of effect See recent scientific reports:

Report by National Assessment Synthesis Team Fourth Assessment Report by

Intergovernmental Panel on Climate Change (IPCC)

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Policy Response to Climate Change

International

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U.N. Framework Convention on Climate Change (UNFCCC)

An agreement reached at the 1992 Rio Summit that dealt with global warming and other air quality issues Called for nations to implement national strategies to limit

GHG emissions with the objective of reducing emissions to 1990 levels by 2000

Avoided uniform emissions targets to accommodate differences in political and economic conditions

Encouraged signatories to recognize climate change in devising economic, social, and environmental policies.

Provided for assistance to developing nations by industrialized countries in obtaining data and in limiting emissions

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Kyoto Protocol to the UNFCCC In July 2001, 178 nations reached an agreement that required

38 industrialized countries to cut GHG emissions to 5.2% below 1990 levels by 2012 Developing countries had no emissions requirements

Because of their exclusion, U.S. did not ratify the agreement

During commitment phase from 2008 to 2012, emissions targets to be achieved using flexible mechanisms, including: GHG allowance trading system for developed nations Credits for carbon-absorbing forestry practices and emissions-reducing

projects in other nations Protocol entered into force in 2005 after being ratified by

developed nations representing at least 55% of carbon emissions

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United Nations Climate Change Conference COP15

In December 2009, UNFCCC holds its COP15 in Copenhagen

Kyoto Protocol expires in 2012 so parties to the protocol must negotiate a new agreement

Need clarity on… emission reduction targets for developed countries mitigation options for developing countries financing solutions for developing world institutions to deploy technology and finance to facilitate

making developing nations equal participants in decisions

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Chicago Climate Exchange (CCX)

A voluntary multinational program devised to mitigate climate change by reducing GHG emissions to predefined targets

Operates the only GHG emissions trading system for North America Implemented through a cap-and-trade system such that

any member achieving greater reductions than the target level can sell or bank excess allowances

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Policy Response to Climate Change

Domestic

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President Bush’s Initiative Called for a cabinet-level review of U.S. climate

change policy and formed climate change working group

Presented results as Global Climate Change Policy Book released in February 2002 Goal was to reduce GHG intensity by 18% by 2012

Equivalent to the average across Kyoto participants

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President Obama’s Position Believes U.S. should become a world leader in

addressing climate change Includes a goal in his Energy Plan to implement a

national cap-and-trade GHG emissions program Expects EPA to propose new rulings to control GHGs In 2009, the EPA announced 2 proposed findings

That six GHGs pose a threat to public health and welfare That vehicle emissions add to GHGs in the atmosphere

and contribute to climate change

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Regional Greenhouse Gas Initiative (RGGI)

10 states participate in mandatory cap-and-trade GHG program for power plants Cap to be lowered over time until it is10% below its

initial level by 2018 Tradeable allowances sold at quarterly auctions

and proceeds used for low-carbon, clean energy technologies

Offsets provided for emissions reduction activities or carbon sequestration external to electricity industry

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Economic Analysis of Climate Change Policy

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Benefits of Controlling GHGsImportant to Policy Development

OECD estimates ($1990) of annual damage $61.6 B (based on 2.5° C rise) $338.6 B (based on 10° C rise over 250-400 years)

Beckerman (1990) cites an EPA estimate of the net effect at between -$10B and +$10B

Mendelsohn and Neumann (1999) estimate the net benefit to the U.S. would be 0.1 percent of GDP

Nordhaus and Boyer (2000) estimate the comparable value at approximately –0.5 percent of GDP

Stern (2007) estimates that with no policy, costs could be 5% to 20% of global GDP per year but costs of responding by controlling GHGs can be limited to 1% per year

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Market Failure AnalysisNegative Externality

Production of electricity using fossil fuels is associated with release of CO2 emissions –

a negative externality Utilities using fossil fuels do not consider the

external costs of CO2 emissions and allocate too many resources to production, and too few are allocated to alternative fuels

Solution depends on government intervention through policy

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Market-Based Policy OptionA Pollution Charge

A pollution charge is a fee that varies with the amount of pollutants released

Three types commonly proposed for climate change issues are:

Gasoline tax – a per unit tax levied on each gallon of gasoline consumed

Btu tax – a per unit charge based on the energy content of fuel, measured in British thermal units (Btu)

Carbon tax – a per unit charge based on the carbon content of fuel

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Analyzing Pollution Charges Drawbacks of a gasoline tax

Targets only polluting sources using gasoline, which are relatively minor CO2 emitters

Imposes a disproportionate burden on some, such as rural communities lacking good public transportation and industries like interstate trucking

So the broader based carbon tax or Btu tax is often proposed as a better alternative

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Analyzing Pollution Charges Btu tax and carbon tax each use a slightly

different tax base, but both encourage fuel switching and conservation by raising fuel prices

Carbon tax is more specific, targeting only carbon-based fuels The carbon tax changes relative fuel prices and

could elevate the price by the MEC of the environmental damage, internalizing the negative externality

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Market-Based Policy OptionTradeable Permit System

Primary means by which developed nations are to achieve their respective emissions targets under the Kyoto Protocol

European Union launched its own GHG trading program in 2005 called European Union GHG Emissions Trading Scheme (EU ETS)

2 trading phases, with the second aligned with the first commitment phase of Kyoto Protocol

Trading can lead to cost-effectiveness Nations best able to reduce emissions do so and sell

permits; those that could not would buy permits

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